CASE 1 Burlington Northern: The ARES Decision

Transcription

1 1 CASE 1 Burlingtn Nrthern: The ARES Decisin Ben Spalding IDENTIFY THE PROBLEM The prblem is shuld Burlingtn Nrthern (BN) buy Advanced Railrad Electrnic System (ARES) in There are many layers t this prblem, first and fremst is that ARES is expected t cst $350 millin. Anther layer t this prblem is that management keeps changing at a rapid rate as the CEO has changed fur times since ICA Burlingtn Nrthern s missin statement: Burlingtn Nrthern is the number ne hauler f spring wheat, and the number tw hauler f crn. Burlingtn Nrthern currently hauls thrugh the American Midwest and the Great Plains in rder t service these grain and crn prducers fr lw csts. In the future Burlingtn Nrthern plans n selling these grains t Eastern Eurpe and Sviet Unin as the new ptential markets emerge. The five frces in Prter s five frces analysis are suppliers, custmers, intra industry cmpetitin, new entrants, and substitutes. We will g thrugh each ne and hw Burlingtn Nrthern is being affected by it. The first frce are suppliers, the peple and businesses giving supplying Burlingtn Nrthern with raw materials such as cal and grain. Cal makes up 90% f Burlingtn Nrthern s revenue (Cash) and they mst f it frm the Pwder River Basin in Mntana and Wyming. I wuld say that Burlingtn Nrthern has higher bargaining pwer here because Unin Pacific, their majr cmpetitr, is nt brught up as having a majr presence here. This means that the switching cst t anther railrad is very high.

2 2 Burlingtn Nrthern s ther majr incme, grains, cme frm farmers. They have little cmpetitin frm trucks in this industry because grain is a bulk cmmdity business. Unfrtunately, demand fr when grains culd be delivered was mre randm than cal because the time t harvest changes annually, in additin t the high variability in exprt demand. Farmers tend t g fr whever wuld deliver fr the lwest price. All f these factrs mean that farmers have mre cntrl in negtiatins with Burlingtn Nrthern. The secnd frce are custmers, the peple and businesses buying Burlingtn Nrthern s services. In this case it verlaps a little with the first because sme custmers let Burlingtn Nrthern train cars, in particular fr cal. In lng term cntracts, Burlingtn Nrthern wuld deliver them cal and the custmer wuld let them use train cars. As a result f this, Burlingtn Nrthern became mre interested in increasing cycle time and nt arrival time, t the pint where...cal culd be dumped withut waiting fr special unlading facilities r warehuse space. (Cash) This is becming prblematic as custmers are realizing the benefits f JIT delivery. I believe that they d nt have bargaining pwer fr mst custmers as they can switch t Unin Pacific r anther railrad service. Althugh they are ding very well with their chemical business, utstandingly s. Dick Lewis, vice president f strategic planning, said We reduced the average delivery time by half, and we als reduce the variability f the delivery time. The shipper als fund he culd get rid f 100 rail cars. (Cash) This sunds like they have greatly increased the switching cst f this particular custmer because they are ding s well, hwever n the whle Burlingtn Nrthern des nt have very strng bargaining pwer with its custmers. The third frce that Prter talks abut in his mdel is intra industry cmpetitin yu want t weaken yur cmpetitin. Burlingtn Nrthern s main cmpetitin is Unin Pacific. Unin Pacific has put serius investments twards: heavy duty duble track and fuel-efficient engines fr carrying cal. Burlingtn Nrthern s management als believes that Unin Pacific had been running excess capacity

3 3 while Burlingtn Nrthern was clse t capacity (Cash). All f this sunds like Unin Pacific is weakening Burlingtn Nrthern. The furth frce is new entrants and what we want t d t new entrants is t create a high barrier fr entry. T enter the railrad market requires prhibitively high amunts f capital t get started s the barrier is already erect. The fifth frce that Prter talks abut is substitutes and there is nthing we can d abut thse. The substitute in this case are trucks as they prvide a mre timely delivery at a mre expensive price and lwer thrughput. Trucking had a hard time getting a fthld until Mtr Carrier Act f 1980 that gave truckers mre freedm in setting rates and entering markets. This put trucks n a mre even playing field because as mre custmers are realizing the benefits f JIT delivery, the vlume f deliveries that trains ffer might becme irrelevant and there is nthing that can be dne abut that. Stakehlders Stakehlders are any rganizatin, persn, grup f peple that are invested in an rganizatin, and rganizatin's need t respnd t them. Accrding t Ludwig vn Bertalanffy s pen system apprach,...rganizatins, like rganisms, are pen t their envirnment and must achieve an apprpriate relatin with that envirnment if they are t survive. (Mrgan, 2006) This is imprtant when discussing Burlingtn Nrthern because they have many stakehlders and if they want t have a clear idea f where t head next, they must understand their envirnment. Gerald Grinstein, CEO 1989 Jack Bell, CFO Bill Greenwd, COO Je Galassi, Executive Vice President, Operatins Jhn Andersn, Executive Vice President fr Marketing and Sales

4 4 Burlingtn Nrthern Senir Executives BN Senir Management Jim Dagnn, Senir Vice President f Labr Relatins Brck Strm, Vice President f Infrmatin System Services Dick Lewis, Vice President f Strategic Planning, 1990 Mark Cane, Vice President f Service Design Burlingtn Nrthern Railrad Operatins Department(headed in Overland Park, KS) Train dispatchers, peratrs, supervisrs Managed supprt functins Infrmatin System Services Research and Develpment Department Research and Develpment Steering Cmmittee Senir fficers f Transprtatin, Engineering, Mechanical, Operatins Service, Marketing, and Infrmatin Systems Keep R&D frm catering t much t ne department Bard f Directrs Burlingtn Nrthern Managers Operatins Persnnel Cnductrs Dispatchers Maintenance-f-Way Crew (MOW crew) Engine Crew Investrs

5 5 Grain Farmers Cmmunity f Pwder River Basin Custmers Ed Butt, ARES Prject Directr Steve Ditmeyer, Chief Engineer, Research, Cmmunicatins, and Cntrl Systems Dn Hendersn, Chsen t versee frmatin f ARES team t manage the prject s develpment Strategic Decisins Grup Rckwell Internatinal, Cllins Transprt Divisin By 1989, Burlingtn Nrthern has spent $15 millin n ARES, Rckwell has expected t have spent three times (Cash) Burlingtn Resurces Inc. T. Bne Pickens Started t purchase Burlingtn Nrthern in 1987 (Cash) Unin Pacific Burlingtn Nrthern s majr cmpetitr Assciatin f American Railrads Develping ATCS Identify Alternatives I have identified 3 alternatives that Burlingtn Nrthern can act n and I will describe the benefits f each ne. The first is t d nthing, the secnd is buy ARES, and the third is t lk fr a buyer fr Burlingtn Nrthern.

6 6 The first ptin, d nthing, means t nt buy ARES and cntinue t payback yur debt the way yu have been. The secnd ptin, buy ARES means that yu shuld spend the $350 millin t acquire ARES and becme a leader in the industry. The third ptin, lk fr a buyer fr Burlingtn Nrthern, means t find smene t buy the cmpany like T. Bne Pickens. Lk fr a Buyer Burlingtn Nrthern shuld lk fr a buyer because they have n mney. This is because they estimated that it wuld take them six years t g frm a 76% debt-t-ttal capital rati t 50% debt-tttal capital rati, which is t slw and Burlingtn Nrthern needs t find smene t buy them. Under the influence f interpretatins f evlutin that emphasize survival f the fittest, cmpetitin is ften encuraged (Mrgan, 2006) The reasn this is a gd idea is because Burlingtn Nrthern already has T. Bne Pickens beginning t buy their stck and their high debt-t-ttal capital rati amng shws this. The reasn that six years is t slw is because while Burlingtn Nrthern is paying back its debt, Unin Pacific is mving twards their gal, and accrding t Gldratt, The gal f every manufacturing rganizatin is t make mney. (Gldratt & Cx, 1984) The reasn that Burlingtn Nrthern shuld nt buy ARES, despite the bst t safety, efficiency, and that it is five years ahead f ATCS, is that they d nt have $350 millin t spend n ARES. Burlingtn Nrthern is currently fcused n paying back debt and buying ARES wuld make the cmpany g bankrupt. Anther reasn they shuld nt buy ARES is because it is nt prductive which is defined as, Every actin that brings a cmpany clser t its gal is prductive. Every actin that des nt bring a cmpany clser is nt prductive. (Gldratt & Cx, 1984) Anther reasn that ARES shuld nt be purchased because it increases perating expenses withut increasing thrughput. The gal is t reduce perating expense and reduce inventry while simultaneusly increasing thrughput. (Gldratt & Cx, 1984) We can treat ARES as an perating

7 7 expense, which are defined as, the mney the system spends in rder t turn inventry int thrughput. (Gldratt & Cx, 1984) This means that it ges against the gal. Burlingtn Nrthern shuld nt d nthing because after they recver t 50% debt-t-ttal capital rati, they will be lagging behind everyne else and have n mmentum. The reasn fr this is Burlingtn Nrthern is dedicating all resurces t paying back debt. T put it in perspective, Unin Pacific will spend six years expanding and imprving infrastructure alngside gaining and maintaining a cmpetitive advantage. Burlingtn Nrthern will be aflat after six years and because f this reasn, d nthing is nt a recmmended alternative.

8 8 Bibligraphy Cash. (n.d.). Building the Infrmatin Age Organizatin. Gldratt, E. M., & Cx, J. (1984). The Gal: A Prcess f Onging Imprvement. Great Barringtn: The Nrth River Press Publishing Cmpany. Mrgan, G. (2006). Images f Organizatin. (M. Vail, Ed.) Thusand Oaks, Califrnia, United States f America: Sage Publicatins.